In e-books case closing arguments, Apple warns of “chilling effect”

"There is no such thing as a conspiracy by telepathy," Apple's attorney says.

Earlier this month, the United States government finally put Apple on trial in a Manhattan courtroom. Its alleged crime? Conspiring with book publishers (all of whom have since settled similar cases with the government) to keep e-book prices artificially high. Federal prosecutors have called Apple the “ringleader” in a scheme to wrest control of the e-book industry away from Amazon.

On Thursday, Apple presented its closing arguments, noting that if the company lost the case it would create a “chilling effect” on how some businesses explore new markets. "We submit a ruling against Apple on this record sets a dangerous precedent," Orin Snyder, Apple’s attorney, said on the final day of the trial. The verdict will come from a federal judge, not a jury.

According to Reuters’ reporting, at one point during the final day of the trial, US District Judge Denise Cote asked Apple to confirm that it "understood publishers were willing to work together to put pressure on Amazon."

Apple’s counsel said that the company was unaware that publishers had been meeting among themselves prior to Apple’s launch of the iBookstore and the iPad. "There is no such thing as a conspiracy by telepathy," Snyder added.

Previously, in a highly unusual move, Judge Cote already indicated her willingness to side with the government.

"I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books and that the circumstantial evidence in this case, including the terms of the agreements [between Apple and publishers], will confirm that," Judge Cote said during a pretrial hearing last week, according to Reuters coverage from before the trial began.

Good goddamn. Look at the last 10 slides from each side. If ever "pound the facts" (DOJ) vs. "pound the table" (Apple) were on display, it's right there.

Those proposed penalties destroy Apple's business model, which I suspect is why Apple sought trial in the first place. I cannot see any other reason Apple would have to avoid taking a plea settlement that would likely be markedly similar to the penalties proposed here.

Ah, good ole Apple, you don't make billions by honest means. If you are not exploiting thousands of Chinese people, not paying your taxes or conspiring behind close doors to rape consumers out of their even-harder earned money, what are you doing?

Publishers are no better though. I am glad Amazon has really stepped up promotion of indie authors - I'd rather see my money divided between the author and Amazon, and cut off the useless greedy publishers out of the money trail.

I have to say that those embedded document viewers are annoying. I clicked on the DOJ one, and then my mouse scroll wheel was entirely captured by it. Even if I clicked somewhere else in the body of the article or the side of the webpage, my wheel was still tied to the document viewer! The only thing I could do to scroll on the article is drag the scroll bar in my browser.

Ah, good ole Apple, you don't make billions by honest means. If you are not exploiting thousands of Chinese people, not paying your taxes or conspiring behind close doors to rape consumers out of their even-harder earned money, what are you doing?

You are clearly typing on some device, online, somewhere.

Who manufactured your device that it was not also exploiting Chinese people? What OS and software and HW are you running that is not also avoiding taxes?

Quote:

Publishers are no better though. I am glad Amazon has really stepped up promotion of indie authors - I'd rather see my money divided between the author and Amazon, and cut off the useless greedy publishers out of the money trail.

Unless you're running Linux (and not Android, since Google is also tax dodging similar to Apple) on a PC entirely manufactured in the US (Intel does in fact make CPUs in the US, but most motherboards aren't), you're hardly in a position to speak either.

However Apple is judged, surely selling stuff under cost simply to hurt the competition should be judged in a negative light? If as a book retailer I make 100% of my income from books, how can I survive if mega-retailer X sells their books under cost, because they are making money from some alternative product. For me that can only be a monopolistic tactic that is designed to put the specialist competition out of business.

The way I see the agency model is that of a clearing house. You can charge what you want, on the condition you treat us equal to the competition, but we will simply take a fixed handing fee, based on a percentage of the price you charge.

In some countries, like the UK, you are required to sell books at universal rate (unless that has changed) and you aren't permitted to change the price. In this scenario it would be Amazon under the gun for providing a different price to the public.

The author's got paid, no matter what. The issue at hand wasn't whether or not Apple could set its own e-book prices, the issue was who controlled the price of the product -- the publisher, or Amazon?

Publishers colluded with Apple to create a market that gave them more power and to force Amazon to give up the ability to set its own prices. I don't see the confusion here.

EDIT:

A full quote from Jobs is illuminating in this context: "Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that — they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, “We’ll go to the agency model, where you set the price, and we get our 30%, and yes the customer pays a little more, but that’s what you want anyway.” But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too [a ‘most favored nation’ clause]. So they went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you the books.”

Here's the point: Publishers were getting their cut. Amazon was taking a loss. It had a right to do so. The entire point of the agency model was to force Amazon to adopt a system that prevented it from setting its own ebook prices. That's insane, because it's the opposite from what a lot of businesses do.

Most industries employ loss leaders -- products sold below cost to entice you into buying other things. Diapers are the easiest example. The grocery store knows that if it can get you in the door to buy diapers, you'll probably buy formula, wipes, some groceries, some Spawn Kibble, and maybe a snack for yourself.

I can't see Apple winning this, however I expect any fine to be a mere slap on the wrist financially. Any fine imposed on Apple will amount to little more than a days profit and hardly likely to discourage corporations from trying to fix the market in future.

I believe the expectation with any price fixing scheme is that eventually they will get caught. The value is in pushing out the competition and doing the damage before the sanctions. The fine is an acceptable write off and a cost of doing business. Fines don't usually resurrect businesses and recreate jobs for competitors stung by this sort of practice.

Call me cynical if you like, but businesses have been doing this sort of thing for years.

I can't see Apple winning this, however I expect any fine to be a mere slap on the wrist financially. Any fine imposed on Apple will amount to little more than a days profit and hardly likely to discourage corporations from trying to fix the market in future.

I believe the expectation with any price fixing scheme is that eventually they will get caught. The value is in pushing out the competition and doing the damage before the sanctions. The fine is an acceptable write off and a cost of doing business. Fines don't usually resurrect businesses and recreate jobs for competitors stung by this sort of practice.

Call me cynical if you like, but businesses have been doing this sort of thing for years.

Agreed. In fact I thoroughly believe the telcoms are doing it now. There's very little price difference between them and I don't see it as a coincidence that when Verizon drops the 20 month upgrade, AT&T does the same a couple months later. I just don't think they've been caught red-handed yet.

I would love to see it happen but unfortunately I believe they have our government in their back pockets and wouldn't face any kind of real punishment. In fact if they were fined I would bet my life they would add the penalty to their customers bills as some sort of federal tax.

However Apple is judged, surely selling stuff under cost simply to hurt the competition should be judged in a negative light?

Why should something that benefits consumers be viewed in a negative light? Do you actually want to pay MORE than you would right now? I just don't get this thought process.

Amazon is providing something to customers at a discount. People are buying in droves. The competition is refusing to compete on this and instead look to collude and gouge prices.

I think you're bass akwards on this. Apple screwed people for no reason other than spite for Amazon.

It's called "predatory pricing" and it's generally illegal. Amazon was putting significant pressure on lowering the standard price of books while also trying to push their ebooks, at the cost of the rest of the market. It was a pretty abusive use of their position in the market in order to dominate the ebook market and ship a whole lot of kindles.

The publishers response wasn't a good idea, for sure, they should have looked for a way to force Amazon to quit that kind of practice and it shouldn't have been through colluding with Apple.

However Apple is judged, surely selling stuff under cost simply to hurt the competition should be judged in a negative light?

Why should something that benefits consumers be viewed in a negative light? Do you actually want to pay MORE than you would right now? I just don't get this thought process.

Amazon is providing something to customers at a discount. People are buying in droves. The competition is refusing to compete on this and instead look to collude and gouge prices.

I think you're bass akwards on this. Apple screwed people for no reason other than spite for Amazon.

It's called "predatory pricing" and it's generally illegal. Amazon was putting significant pressure on lowering the standard price of books while also trying to push their ebooks, at the cost of the rest of the market. It was a pretty abusive use of their position in the market in order to dominate the ebook market and ship a whole lot of kindles.

The publishers response wasn't a good idea, for sure, they should have looked for a way to force Amazon to quit that kind of practice and it shouldn't have been through colluding with Apple.

So what, in your mind, is the difference between loss leading and predatory pricing? Amazon was still turning a profit so I don't see how the competition couldn't either. Amazon isn't a monopoly either so I don't see how that qualifies.

Nothing stopped the publishers from pulling their books from Amazon if they wanted too, in fact they did do this on a number of occasions only to come back because the customers demanded it.

BTW predatory pricing isn't illegal unless the company is a monopoly. Otherwise its just good old fashioned competition.

I can't see Apple winning this, however I expect any fine to be a mere slap on the wrist financially. Any fine imposed on Apple will amount to little more than a days profit and hardly likely to discourage corporations from trying to fix the market in future.

I believe the expectation with any price fixing scheme is that eventually they will get caught. The value is in pushing out the competition and doing the damage before the sanctions. The fine is an acceptable write off and a cost of doing business. Fines don't usually resurrect businesses and recreate jobs for competitors stung by this sort of practice.

Call me cynical if you like, but businesses have been doing this sort of thing for years.

Not for Apple it's not. 5 years of being unable to utilized their standard business practices? Snyder was correct about one thing, they do have three options: compete head-to-head with Amazon (and lose money), the (likely now barred) agency/MFN model, or not compete in the market. Which, I'm pretty sure, is exactly the theoretical benefit of a free market for the consumer: the best possible efficiency in terms of price. Competition is merely a means to an end. If Apple doesn't want to compete...it doesn't have to. Amazon didn't do anything extraordinary to bar them from a competitive market. Apple leveraged an agency/MFN agreement to effectively increase book prices for everyone.

So yeah, I'd chalk this one up as a loss. DOJ even points out that by the standard Snyder prescribed in opening arguments Apple is guilty of anti-competitive practices. All that remains to be seen is whether the judge is on board with DOJ's proposed penalties.

However Apple is judged, surely selling stuff under cost simply to hurt the competition should be judged in a negative light? If as a book retailer I make 100% of my income from books, how can I survive if mega-retailer X sells their books under cost, because they are making money from some alternative product. For me that can only be a monopolistic tactic that is designed to put the specialist competition out of business.

Amazon never sold eBooks under cost. Just under what publishers desired.

Also, Amazon was selling SOME books as loss leaders in order to _create_ a healthy e-book market.

At the time the Kindle was introduced, the market was tiny - - Sony, etc. were only selling a small number of readers and a small number of books. People in comment and forum threads (including here at Ars) were predicting that the Kindle would be a failure.

Once Amazon proved successful, then the publishers got scared about protecting their $28 hardcover sales and colluded with Apple to fix prices.

SO many justifications, its like talking to alcoholics and drug addicts who won't stop their habitsand keep defending their rights to screw themselves and harm other people with what they enjoy doing.Why make it so complicated?They conspired against the public in trying to control the free market forces.So what if Amazon was willing to take a loss selling the ebooks when the publishers were paid anyway at their agreed on price?The only one losing was Amazon the middleman yet both buyers and publishers still gained.The focus should not be on Amazon but on what Apple and its fellow conspirators ehem, collusionistswere doing raising the prices of ebooks artificially.Its aggravating to see digital products being more expensive than their physical counterparts.

A bit of history for the younger folks (though I doubt anybody is still alive that lived through it): The practice of underselling the competition was a very successful tactic used by Standard Oil to secure their monopoly. They would undersell gasoline to entice customers away from the competition. Eventually the competition failed due to lack of customers. Once the competition was gone, Standard Oil would raise their prices above what the competition had been using.

It's a tactic that only works for a large company that can afford to take losses for an extended period of time. It allows large business to choke out the competition so THEY decide what price is paid for what level of service, rather than letting the consumer choose from a variety of competing options.

A bit of history for the younger folks (though I doubt anybody is still alive that lived through it): The practice of underselling the competition was a very successful tactic used by Standard Oil to secure their monopoly. They would undersell gasoline to entice customers away from the competition. Eventually the competition failed due to lack of customers. Once the competition was gone, Standard Oil would raise their prices above what the competition had been using.

It's a tactic that only works for a large company that can afford to take losses for an extended period of time. It allows large business to choke out the competition so THEY decide what price is paid for what level of service, rather than letting the consumer choose from a variety of competing options.

The problem is, Apple is trying to argue that Amazon was a monopoly and also that they were involved in predatory pricing to drive out the competition. You can't have it both ways.

This case is about what apple was doing and whether or not it was illegal. I dont see how anyone can realistically bring Amazon into it when everything about this case is about what apple and the publishers did.

I want to know if apple helped pay for the publishers to settle, it seems to me that it helped their defense. Those guys collude but we didn't know or facilitate it, only suggests that they work together, so we are in fact blameless.

It just comes down to apple didn't force amazon into agency, the publishers did wanting to preserve their profits. Amazon and the publishers had several options.

However Apple is judged, surely selling stuff under cost simply to hurt the competition should be judged in a negative light? If as a book retailer I make 100% of my income from books, how can I survive if mega-retailer X sells their books under cost, because they are making money from some alternative product. For me that can only be a monopolistic tactic that is designed to put the specialist competition out of business.

Amazon never sold eBooks under cost. Just under what publishers desired.

Selling a $10 eBook for $8 qualifies as under cost.

$10 is what the publishers charged Amazon.$8 is what Amazon charged customers.

A lot of Apple hate in these posts, but I don't understand why people aren't upset by the monopoly that Amazon held on e-books before Apple entered the scene. Read dstarfire's post about the oil company monopoly that used to be Standard Oil. Amazon is the new Standard Oil, at least in the e-book scene.

Ah, good ole Apple, you don't make billions by honest means. If you are not exploiting thousands of Chinese people, not paying your taxes or conspiring behind close doors to rape consumers out of their even-harder earned money, what are you doing?

Publishers are no better though. I am glad Amazon has really stepped up promotion of indie authors - I'd rather see my money divided between the author and Amazon, and cut off the useless greedy publishers out of the money trail.

Uhm, lets be fair. I believe Apple is a truely evil company but they didn't cheat on their taxes. If you try to reduce your tax burden as much as possible then don't hammer them for doing it. However, their exploitation of workers, ham fisted approach to their walled garden, and over priced/under powered hardware earn my full contempt.

I can't see Apple winning this, however I expect any fine to be a mere slap on the wrist financially. Any fine imposed on Apple will amount to little more than a days profit and hardly likely to discourage corporations from trying to fix the market in future.

I believe the expectation with any price fixing scheme is that eventually they will get caught. The value is in pushing out the competition and doing the damage before the sanctions. The fine is an acceptable write off and a cost of doing business. Fines don't usually resurrect businesses and recreate jobs for competitors stung by this sort of practice.

Call me cynical if you like, but businesses have been doing this sort of thing for years.

Agreed. In fact I thoroughly believe the telcoms are doing it now. There's very little price difference between them and I don't see it as a coincidence that when Verizon drops the 20 month upgrade, AT&T does the same a couple months later. I just don't think they've been caught red-handed yet.

That's what you get in oligopolies. Airlines do the same thing. One will raise its prices and the rest will follow along, except the times they don't. It's not conspiracy, it's just how this kind of market works. The problem is that the onerous 2 year contracts mean that any corrections take years to play out. We may yet see AT&T and Verizon walk back from their current policies, but it will take time. Hopefully, the next FCC auction will finally allow Sprint and T-Mobile the ability to compete on more even terms.

The senior officers of either company will never, EVER stand in the same room as officers of the other without a minimum of several 3rd party witnesses available. The risk of conspiracy is too great.

However Apple is judged, surely selling stuff under cost simply to hurt the competition should be judged in a negative light? If as a book retailer I make 100% of my income from books, how can I survive if mega-retailer X sells their books under cost, because they are making money from some alternative product. For me that can only be a monopolistic tactic that is designed to put the specialist competition out of business.

Amazon never sold eBooks under cost. Just under what publishers desired.

Selling a $10 eBook for $8 qualifies as under cost.

$10 is what the publishers charged Amazon.$8 is what Amazon charged customers.

If you do this for one book out of ten, it is known as a loss leader. It's an industry standard practice in retail. There is nothing anti-competitive or underhanded about it.

This trial and the issue at hand is far more subtle and nuanced than many of the previous posters (and the judge in this case as well) thought as the trial began. Apple may well prevail.

Myrrdin-esque!

Clever of you.

Here's what the judge said on Wednesday after oral arguments had concluded.

“I thought I had prepared so well,” she said. ”I learned a lot. But you have helped me understand so much more through the evidence presented.”

“I look forward to your summations,” she concluded. “It seems to me the issues have somewhat shifted during the course of the trial. Things change. People have to stay nimble. I’m looking forward to understanding where we are now.”

Did I miss something in economics class? I understand Apple's motivation. They, like some other vendors, make vendors agree to not advertise a price below the pricing that Apple wants the product to go for. So, they think books should be the same.

I think this whole idea breaks capitalism in a big way. What happened to competition? If everyone sells the product at the same price, what is the point of competition?

If Amazon wants to use loss leaders, let them. Grocery stores do it all the time. Do Americans really believe in capitalism at all?

1) Even if Amazon had a monopoly on e-book sales (it didn't), that's not illegal. Monopolies are not in and of themselves illegal - only abusing them. No one complains about Amazon because, while it theoretically COULD have hiked its prices and milked a load of cash out of consumers, it DIDN'T. Maybe if it had there's be a lot more anti-Amazon sentiment around.

2) It's also missing the point because, again, Amazon isn't on trial here. The question is whether Apple was part of a conspiracy, and "we were, but the victims totally deserved it" isn't a valid defense.

A lot of Apple hate in these posts, but I don't understand why people aren't upset by the monopoly that Amazon held on e-books before Apple entered the scene. Read dstarfire's post about the oil company monopoly that used to be Standard Oil. Amazon is the new Standard Oil, at least in the e-book scene.

I'm not responsible for the morality of Amazon's acts. Amazon sold books for $10 and I don't care if they made or lost money. Once Apple got into the act, prices rose $3-5 per book. My entire feeling about this matter is although I'm not an Apple customer, their acts made my costs for books rise. So as far as I'm concerned, they are guilty as charged. Amazon started dropping prices as the publishers settled, and I don't care if they make or lose money - I just want to buy books as inexpensively as possible.

Grocery stores put items on sale every week to get people in the door. Do you avoid the green beans that are sold below cost, or does this tactic work to bring you to the store, where you'll hopefully buy other products they make money on. That's no different than what Amazon was doing until Apple and the publishers colluded to stop them.

The slide decks are certainly interesting. WIthout the full testimony, it's hard to pass judgement on some of the comments. THe Justice Department deck seemed to make the case much better for the conspiracy in how it laid out the back and forth communication.

One item of note that I didn't know about the damages was that they are going to require Apple to remove the restrictions on other book sellers having a link to their stores in their apps. That's a nice direct win for consumers, if a small one.

This case is about what apple was doing and whether or not it was illegal. I dont see how anyone can realistically bring Amazon into it when everything about this case is about what apple and the publishers did.

Because Apple keeps on bringing it up.

Ultimately, the big point is that the DoJ had a consistent, clear "story" that they presented. Apple - not so much. And in the end, I think that's what will decide things.